Avis’ Zipcar Deal: More Show Than Substance

by Dan Burrows | January 2, 2013 12:13 pm

Maybe Avis shouldn’t try so hard after all.

Shares in Avis Budget Group (NASDAQ:CAR[1]) — the nation’s third-largest car-rental company after privately held Enterprise and Hertz (NYSE:HTZ[2]) — are burning rubber. So why make a big acquisition for a perennially unprofitable business now?

Avis said Monday it would buy Zipcar (NASDAQ:ZIP[3]), the fast-growing car-sharing and hourly rental business, for $491 million[4].

Yes, the move helps Avis play catch-up with its bigger competitors — especially after Hertz won the battle to buy Dollar Thrifty for $2.6 billion in August[5]. Meanwhile, Enterprise went big into the car-sharing business after buying Mint Cars On-Demand and PhillyCarShare last year.

“We see car sharing as highly complementary to traditional car rental, with rapid growth potential and representing a scalable opportunity for us as a combined company,” Avis CEO Ronald Nelson said in a media release.

Well, fine. But as fast as Zipcar has grown — from revenue of just $58 million in fiscal 2007 to $242 million in 2011 — it has never posted a net profit since being founded more than a decade ago.

At the same time, before Avis’ offer — a whopping 49% premium to the most recent closing price — Zipcar’s stock had lost 70% since going public in April 2011.

So, yeah, it’s great news for Zipcar shareholders. But what about Avis?

Well, the fast-growing but always unprofitable car-sharing service could just have Avis spinning its wheels.

Despite being lapped in market share, it’s not as if things are going badly for Avis’ stock. Shares are up 92% in the past 52 weeks versus a 16% gain for the S&P 500. Hertz is up 43% during the same span.

True, as we noted after Hertz bought Dollar Thrifty, consolidation has been the name of the game[6] in the rental-car industry for the better part of a decade. There used to be nine big independent names — now there are just three. And since Enterprise is privately held, only Hertz and Avis offer traders and investors a way to bet on this sector of the travel business.

At the same time, Hertz’s big acquisition pushed Avis into the No. 3 position, leaving it trailing the pack by a stretch. Enterprise, with 38% of the U.S. market, is by far the biggest player. After adding in Dollar Thrifty, Hertz jumped to almost 24% market share from 18.9%. Avis, formerly neck-and-neck with Hertz, now lags behind at about 18.5% market share.

But the Zipcar deal looks more like a tack-on play at this point — with plenty of risk, to boot. Avis expects to find annual savings in the deal of $50 million to $70 million. (It better, because Zipcar lost a total of about $26 million from fiscal 2009 to 2011.) Meanwhile, the acquisition is forecast to add to Avis’ earnings on an adjusted basis in the second year after the deal closes — so sometime in 2015.

So the “rapid growth potential”? Maybe not.

Really big growth will come from an increase in business and leisure travel, and that’s more dependent on stronger economic growth — not buying what’s essentially still an unprofitable niche player.

As of this writing, Dan Burrows did not hold positions in any of the aforementioned securities.